Need to Talk?

Debt consolidation seems like a very difficult task if you are living from paycheck to paycheck. This is a type of financial situation wherein your income is just enough to cover your monthly expenses. You do not have any extra money left over after all your financial obligations are paid off. You find yourself running out of money a few days before your paycheck. This can be a very stressful financial position because you do not have the extra money to cover any unexpected expense.

The combination of debt and living from paycheck to paycheck seems like a very difficult situation to be in. How can you afford to pay off your debts if you are hardly getting by? Well, debt consolidation can surely make things better when it comes to your debt payments. It will allow you to focus on other things because your debt repayment plan is more simple. Among the things that you should look into is how you can improve your financial situation so you are no longer living from paycheck to paycheck.

Tips to succeed in debt consolidation despite limited finances

What is great about using debt consolidation is that it requires little effort to monitor and manage. This will give you the opportunity to work on a couple of things that will hopefully have a positive effect on your finances. Obviously, if your income is barely enough to cover your expenses, there is something wrong with how you manage your finances. Do not make the mistake of thinking that all you need is a higher income to get by. It will help, that is true. However, it is not a solution.

To ensure that you are improving your financial situation while using debt consolidation, here are the things you need to look into so you can succeed are your debt relief efforts.

Budget

If you really want to get better at handling your finances, you need to start by looking at your current budget plan. You need to check both your income and expenses to find out why you are in this financial situation. Are you spending too much? Or maybe you are earning too little? Maybe your budget plan is no longer aligned with your current financial position. You need to change that and give your plan an update. List all your expenses and compare it with your income. If you find that your expenses exceed your income, you know that something has to change.

Lower spending

As you look into your budget plan, it is important for you to focus your attention on your spending. Your limited resources should prompt you to be careful with how you spend it. You need to list all your expenses and rank them according to priority. This will make it easier for you to identify the expenses that you can cut back on.

The goal here is not just to lower your spending but also to be smarter with your choices. It is the fastest way you can get extra money so you no longer have to live from paycheck to paycheck. You should also know that smart spending is one of the ways that you can guarantee success when it comes to debt consolidation.

Increase your income

If you have exhausted all your efforts to lower your spending and you are still struggling with debt consolidation, you might want to consider increasing your income. Lowering your expenses can only do so much. This can limit the improvement that your finances need to go through in order to stop living from paycheck to paycheck. Earning more will make it easier for you to build your personal net worth while you are paying off your debts. It will also help you achieve financial security a lot faster.

Stop using debt

Apparently, it is not just hard for us to keep on borrowing money. When we are in a tough and unexpected situation it can also drive us to borrow more money. A published report revealed that 4 out of 10 adults will borrow money in order to get out of an emergency expense. This is a bad idea when you are in the midst of a debt consolidation program. You have to try and avoid being put in this situation. You have to exert self-control so you will not use credit cards unnecessarily. If you cannot afford to pay for something in cash, do not spend.

It is also a good idea to have an emergency fund. That way, you do not have to resort to debt for every unexpected event that will happen in your life. You have this reserve fund to tap into if you need to pay for something important that is not in your budget.

Make sure you have the right debt consolidation strategy

Apart from trying to improve your financial situation, you should also make sure that you are using the right debt consolidation strategy. Having the wrong debt solution will still make the debt relief journey difficult and stressful. It will be hard for you to take care of the various aspects of your financial life so you can stop living from paycheck to paycheck.

There are two things that you need to ask yourself while choosing among the different debt consolidation options.

How much can you afford

First of all, you need to be honest about how much you can afford. Consolidating debts will not reduce the principal amount that you owe. You can save by lowering the interest rates but nothing will be done for the original debt that you borrowed. You have to pay it all back. If you think that downsizing your lifestyle will still make it impossible to afford to pay off your debts, then you might need a debt reduction.

What is your current credit score

You also have to consider your current credit score situation. If it is high, you can opt to borrow a loan or open a new credit card account to consolidate debt. A good credit score will help you get a low-interest rate which in turn will help you save money. However, if you have a bad score, you might want to opt for debt management instead. Both these options will consolidate debt but the effect will depend on what your credit score is.

Admittedly, completely paying off your debt can be very challenging. This is why you need to have a debt solution that will make things easier to accomplish. It will help you have a more structured payment that is customized according to your financial situation. That means it will allow you to pay off your debts without making it feel like a burden.

One of the best strategies to improve your repayment plan is to consolidate multiple debts. And you can do that by refinancing one of your current debts.

Use these 3 debts to consolidate multiple debts by refinancing

Refinancing involves getting a new loan for an existing one. The goal is usually to take advantage of improvements to the repayment plan. This can include a shorter or longer repayment period. This will depend on how much you can afford to pay each month. The improvement can also be on the interest rate. If you can get a lower interest rate, that would be a huge improvement.

Now that you have an idea on what refinancing is all about, let us get to know how you can do it. There are three types of debt that you can refinance to help you consolidate the different debts that you owe.

Mortgage refinancing

This is probably the most popular way to refinance. At least, this is true for homeowners. The great thing about a mortgage is that every payment you make adds to your home’s equity. Thanks to this growing equity, you can expect your personal net worth to increase as well. The best part about this is you can use it to help make debt repayment easier.

When you refinance your mortgage, you need to find out how much equity you have. The thing about using a mortgage is you need to pay closing costs to complete the application. But if the decrease in the interest rates can make up for these costs, then it could still work out in your favor. As you refinance, you can also use the equity to consolidate multiple debts. If you include high-interest rate credit card debts, it might even be more beneficial.

Auto loan refinancing

Another refinancing option involves your car loan. Just like your mortgage, this can help with high-interest debts because it is a secured loan. You are putting the vehicle as collateral. However, unlike a home loan, the collateral does not appreciate in value. Instead, cars depreciate. This is why it is best for short-term repayment plans. You also cannot expect to refinance a huge debt amount because, as mentioned, cars depreciate in value.

The same rule applies when you take out an auto refinancing. You have to pay it off as quickly as possible so you can benefit from the savings.

Balance transfer cards

Technically, this is credit card refinancing. You get a new credit card that you will use to transfer all your debts. A balance transfer card is usually offered with a 0% interest rate or at least a very low one. When you transfer your other credit card debts, you need to pay a fee that is usually 3% of the amount you transferred. But with all the savings you get from the 0% interest rate, it should be worth it.

This interest rate is only temporary so you should make sure that you can pay all of your debts within the promo period. Otherwise, the card will have a higher interest rate and it can cost you more. If you really want to consolidate credit card debt through a balance transfer, make sure that you have a short repayment plan. That way, you do not have to worry about the high-interest rate once the 0% interest rate expires.

Apart from credit cards, it is also possible to consolidate personal loans. But make sure you make the necessary calculations. You want to ensure that you are saving money and not paying more if you just left the debts in their original repayment plans.

When is it a good idea to refinance for consolidation

Although some people can swear that refinancing to consolidate multiple debts is a good idea, it is not always the case. There are specific situations when it can be a bad idea while there are instances when it is a good one.

Here are the specific situations when consolidating debts through refinancing is a good idea.

When you have a better credit score

Your credit score has a huge influence on your interest rate. If you have improved your credit reputation since you borrowed your original debts, it could help you get a lower interest rate. This will really work well in your favor. You get more options and probably negotiate better terms for the new loan that you will borrow.

When you need better repayment terms

Finally, it makes sense to consolidate multiple debts through refinancing if you can improve your repayment terms. By improvement, this means it suits your financial situation better. A lot of things can happen from the moment you started with your debts until this very moment. It is possible that events in your life made it harder to keep up with payments. If that is the case, then you need a new repayment plan that will allow you to pay a smaller amount. Or maybe there is now a need to pay off your debts faster. That means you need to be able to make bigger payments so you can completely pay off your debts within a shorter time. These can be arranged when you refinance your debts.

One of the goals of debt consolidation is to help improve personal finances. You have to understand, though, that it is not because of the debt relief program itself. It is more of the habits that you will learn as you pay off your debts.

The truth is, paying off your debts is not an easy thing to do. And if you use debt consolidation to get out of debt, you will not be getting any debt reduction. That means you have to pay back every single cent that you owe. This can be quite stressful and you might find it to be one of the most challenging things that you can do.

This is the reason why you need to make sure that you will end up with an improved financial future after all your efforts to get out of debt. If you have to work hard for it, you want to ensure that you can maximize the positive effects of this debt solution.

The only way to do that is to implement certain habits that will help improve personal finances after you consolidate your debts.

Life after debt consolidation is not exactly debt freedom

Let us get one thing straight. When we say after consolidating debt, this does not mean you are already debt free. There are two things that you need to remember after you have consolidated your multiple debts.

You still have to pay off your debts

Debt consolidation is a debt repayment tool. It helps you get better terms on your loan. It can be in the form of lower interest rates or lower monthly payments. The bottom line is, it will only restructure your debts. You still owe the same amount of money. More importantly, you still have to pay it all off.

Sometimes, people get a false sense of debt freedom after consolidating debts. After all, their original debts have been paid off. But you should never forget that the payment used is also debt. Now you have to pay off that new debt.

You still have to identify why you got into debt

Another truth that you have to remember is identifying what got you into debt in the first place. If you really want to improve personal finances, you need to identify what this is. Failing to do so might end up landing you in the same financial situation again.

There are man reasons why someone is in debt. Maybe you are overspending and you did not know it. Having a budget plan can solve this. Or maybe you do not have sufficient emergency funds. That means when something unexpected happens, you will be forced to borrow money in order to get past it. Once you solve the real cause of your debt situation, it will be easier for you to improve personal finances and stay out of debt.

Implement these habits to improve your personal finances

So what are the things that you need to do in order to improve your financial situation after consolidating your debts?

Assess your current financial situation

Start by assessing your financial situation. At this point, you just consolidated your debts. As explained, this does not mean you are already free from debt. You still have a long way to go when it comes to completely achieving debt freedom. With this in mind, you need to check your current budget plan. Make sure that it is aligned with the new repayment plan that you have. This will ensure that your monthly payments will be funded. Make it a priority.

Live below your means

After scrutinizing your budget plan, it is time to make a commitment to live below your means. This is also the perfect time to look at your income and expenses. See how much of your earnings go to your bills, debts, and even entertainment expenses. Maybe you can cut back on some of your expenses. According to a recent survey, Americans spend an average of $5,339 on nonessentials. This means it is not necessary for you to survive. If you have a lot of these, you might want to cut back on it. Use the money on something that can improve personal finances instead. You can also check if you can earn more. These will allow you to increase your extra money to pay more towards your debts. Not only that, but it will also give you want you to need to reach other financial goals simultaneously.

Boost your emergency fund

We mentioned that a lack of emergency funds can be a reason to land in debt. If you want to stay out of debt, you need to start saving for an emergency fund. This will ensure that if something unexpected happens, you will not be forced to borrow money. Whether it is an accident, a trip to the ER or a busted transmission, an emergency fund will help pay for these expenses without debt. This fund will also help you be more financially secure. Despite the fact that you are still in debt, this will help lower the stress that comes with paying back any money that you owe.

Commit to saving 5% of your income

The last habit that you need to implement in your life is consistently is saving a part of your income. Based on reports, there is a general increase in savings across all income levels. It seems like people are starting to understand the value of saving more.

What you have to realize is that the amount you save does not have to be a big amount. As long as you are putting away an amount in your savings every month, that will eventually grow. If you consistently save even $100 each week, that will be $400 at the end of the month. In one year, it will be $4,800. If you keep doing this for three years, you will soon have $14,400. This should be enough to help secure your financial future.

With a functional budget plan, smarter spending habits, adequate emergency funds, and increasing savings, it should be easy to improve personal finances. Combine that with your debt freedom and you will find yourself in a stronger and more positive financial position.